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Hi Sir,
Can I ask you two questions re past service costs as well as curtailment gain for defined benefit plan?
1. past service costs:
In the example in Kaplan testbook, an entity operates a defined benefit plan that provides a pension of 2% of final salary for each year of service. On the start of year 1 Jan 20×5, it improved to 2.5%, including service before that date. Employees must have worked for the entity for at least 5 years. At the date of improvement, the present value of the additional benefits for service from 1 Jan 20X1 to 1 Jan 20X5, is as follows:
Employees with more than 5 years’ service at 1.1.X5 150
Employees with less than 5 years’ service at 1.1.X5 120
(average length of service: 2 years)
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270
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Question: explain how the additional benefits are accounted for in the financial statements of the entity.The solution uses the figure of 270, including employees with less than 5 years’ service at 1.1.20X5. I don’t understand why. Doesn’t the entity stipulate that employees must have worked for the entity for at least 5 years to qualify for the additional pension benefit? So why then use 270, but not 150?
2. Curtailment gains:
Curtailment is included in the calculation of service cost components. Can I ask if curtailment gain reduces the service cost?Thanks.
Hi Iukayl
I think the instance you mentioned is an amendment rather than a curtailment because IAS19 defines “A curtailment is a significant reduction by the entity in the number of employees covered by the plan”. In this case, it is an amendment to improve employee’s benefits.Regarding your 2nd question, an amendment will result in an increase or a decrease in the present value of the defined benefit obligation. Thus, a past service cost which may be positive or negative amount, will be charged to profit or loss in the year of amendment occurs
As regards your 1st question, my opinion is that the plan obligation is to exchange for services provided employees, therefore, although the vesting period is 5 years, expenses must be accrued during the time the services are provided, not when they complete 5 year service. Therefore, past service costs resulting from the amendment associated with less than 5 year service emloyees must be recognised in the amendment year
I don’t think that I could improve on the explanation above!.
You can think of curtailment as another form of past service cost or income
- Topics: 43
- Replies: 124
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Hi nhungnguyen6710,
Thank you. Re curtailment v amendment, the two questions are unrelated. They just happen to be included in this one ticket post.
Re curtailment gains in service cost component, so you were saying now that this is a gain, it will negative affect the service cost position, right?
Re vesting conditions, I get it now. Thank you.
Hi Iukayl,
Yes, it will be deducted from the service costs in the year but under the heading of “Past service costs” in profit or loss.- Topics: 43
- Replies: 124
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Thank you.
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